How to Consolidate Credit Cards (and Why You Probably Shouldn’t)

Today we are going to talk about how to consolidate credit cards by refinancing your credit card debt into a singular loan or account with a singular payment. As you might guess, this can be done in several different ways, some more dangerous than others. We will cover most of these and show the pros and cons of each method along with suggestions and words of caution so that you can make informed decisions and put yourself in the best financial position. Along the way, we will also highlight the features of a different program that is much safer and better for long-term financial health. Let’s dive in.

How to Consolidate Credit Cards

There are numerous ways to consolidate credit. Here are a few of the most common.

Balance Transfer

This is the most literal method of consolidating credit cards. In the case of balance transfers, the consumer actually takes multiple credit card balances and merges them all onto one credit card. The idea is that this new card will have a lower interest rate than any of the cards that were consolidated.

In the best-case scenario, the consumer would open the card during a promotion at a “teaser rate.” This rate is low, sometimes zero percent, and lasts only for a promotional period, say 12 months. The goal is then to pay down as much as possible before the period ends and the rate jumps to a much higher level.

In recent years, balance transfers have become a less realistic option. New legislation has caused creditors to require higher minimum payments (so that consumers pay off debts in a timely fashion). On the other side of things, consumers have abused balance transfers by using the strategy repeatedly, hopping from card to card. Both of these factors have made creditors less willing to promote balance transfer at tempting promotional rates.

Even though cards may come with a low APR, there may still be balance transfer fees. This will have implications on how smart of a decision it is to use consolidation and may limit how much you are able to save with this method. For instance, if you transfer $20,000 and a pay a balance transfer fee of three percent, this will amount to $600.
Consumers who opt for a balance transfer should implement some basic strategies that can help them save:

Look for zero percent introductory APR offers that last for more than six months.

Try to extend the promotional period via negotiating with the creditor.

Use quantity as a bargaining chip. If you are transferring multiple balances, use this to leverage a lower transfer fee or a flat rate for all transfers.

Debt Consolidation Loans

This is a generic term describing any loan that is used to pay off other debts. Within this category are different types of loans, some riskier than others. The unsecured type of loans used to consolidate credit cards usually come in the form of personal loans. To make a long story short, a consumer could take out the personal loan to pay off various debts and then just make payments toward the loan. Ideally, this loan would come from a bank or credit union. The thing to consider in this case is the interest rate and any fees. If the interest rate is lower than the debt and fees are minimal, this could be a valid option.

Secured Loans: The Dangerous Options

We talked about secured debt consolidation in detail already, but let’s review. Consumers who choose to consolidate credit cards with this strategy are moving unsecured debt into secured debt. In other words, they are moving debt with mild consequences for not paying to debts that have serious consequences for not paying. These consumers are putting important financial assets, like their cars and homes, at risk in these situations and will usually lose these assets if they don’t repay.

Avoid the Middle Man

There are agencies out there who have crafted debt consolidation programs. In general, you will want to avoid these services. By being “middle men,” these services charge fees that make your overall payment more expensive. And in many cases, they aren’t really adding any value that you couldn’t create yourself by seeking a bank loan or another consolidation method. This brings us to an important difference between consolidation companies and debt management companies. NFCC-certified debt management companies provide added value that you likely couldn’t obtain on your own such as lower interest rates and waived fees (more on debt management later).

Debt Consolidation and Credit Scores

An important factor to consider before jumping into debt consolidation is the effect it can have on your credit score. Unfortunately, there is no cookie cutter answer here and your score could swing either way, depending on several factors. If a consumer is struggling before using consolidation but then begins to make timely payments after undergoing consolidation, then the consumer could see a lift in his/her credit score. On the other hand, there are several ways that consolidation could dent a credit score.

Taking out a new loan or opening a new credit card will require a hard credit check, creating a temporary ding in your score. Also, moving multiple debts onto one account can cause that account to have a high utilization ratio which can decrease your score. It’s also a good idea to leave the old credit accounts open in order to protect your score. This keeps these accounts as having a successful history and helps maintain your overall utilization. There are two caveats here, though. First, by leaving the accounts open you leave yourself open to the temptation to use the cards. Also, some argue that when consumers with poor credit histories have multiple open, empty accounts, they can be viewed as even riskier because of their potential to rack up more debt.

Why You Shouldn’t Use Debt Consolidation

Debt consolidation, in all forms, involves taking multiple debts and moving them to a single debt. But having a single debt is not necessarily good. Think about it—having one bad thing isn’t necessarily better than have multiple bad things if that one is really, really big and bad. It’s sort of like when you take multiple dirty clothes piles and stuff them all in your closet. Most people wouldn’t say that this “new pile” is better; instead it is covering up the underlying issue. Ok, maybe that was a random analogy, but it’s true!

But in the grand scheme of things, debt consolidation isn’t as bad as some other forms of debt relief. In particular, it’s safer than debt settlement. But with that said, it’s also not as good debt management. Here’s why:

What You are Risking

This is actually the one area where debt consolidation could be considered more dangerous than settlement. Those who use secured debt consolidation tactics are risking their valuable financial assets. Failing to pay in this situation could quickly turn into a financial nightmare.
Even in cases of unsecured consolidation, such as balance transfers, there is a risk of paying more in the long term and entering a vicious cycle of growing interest rates. Consumers who use consolidation techniques to take advantage of a “deal” such as a teaser rate will be in big trouble if they fail pay off the debt before the promotion expires.

No Behavior Change

Debt consolidation typically doesn’t lead to a change in behavior. When consumers take out a consolidation loan or use a balance transfer, they aren’t getting any profession advice or guidance, and they may not be adding important budgeting skills to their lifestyles. Because of this lack of a behavior change, it’s likely that most people who use consolidation will just end up going further into debt. In fact, some studies suggest that 70 percent of those who use consolidation end up taking on more debt.

Fees and Credit Score

We have already discussed both of these in some detail, but consolidation brings about fees and the potential to damage your credit score. Again, keep in mind that these are even worse with debt settlement, but they are better with debt management.

A Better Option

A debt management plan could be a much better option for dealing with your debt. In a debt management plan, your credit counselor helps you gain access to benefits like lower interest rates and waived fees from your creditors. Your counselor helps you create a structured plan that clearly demonstrates how much you need to pay each month in order to become debt free. On top of this, your counselor helps you learn the important skills necessary to save money along the way, make your repayment go by more quickly, and set yourself up for a solid financial future. This program just simply doesn’t put you at risk like debt consolidation might. Its fees, impact on your credit score, and chance of success are all more beneficial to you and all have your success in mind.

It’s free to talk with a counselor and get a thorough review of your budget. Get started today.

Thomas Bright is a longstanding Clearpoint blogger and student loan repayment aficionado who hopes that his writing can simplify complex subjects. When he’s not writing, you’ll find him hiking, running or reading philosophy. You can follow him on Twitter.

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Trish

Thomas Bright

If you keep them open (but don’t use them), you will keep a higher “account age,” which all things considered will contribute to a higher FICO credit score. So in many cases that will be your best option. Just be sure not to use them if at all possible while you focus on paying the consolidated debt.

Jina

Thomas Bright

That’s a great question. Oftentimes they are used interchangeably, but really they can refer to two different things. Consolidation just means using a new loan or line of credit to pay for multiple debts. So often times, people will roll two or more credit card debts into a new loan, like a HELOC for example. But really, it doesn’t have to be credit debt. They could do the same thing potentially with a vehicle loan, medical bills or other debts.